Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[sculpin]

With dropping heavy oil supplies from both Mexico & Venezuela, future looking much brighter for many of the Canadian heavy oil producers. Share prices have by and large been annihilated over the 3 year bear market in oil - Pengrowth (PGF - TSX), Athabasca (ATH - TSX), Cenovus (CVE - TSX) , Cardinal (CJ - TSX), Gear (GXE - TSX)etc. Pipeline constraints will limit upside somewhat but oil by rail will be growing....

 

http://www.worldoil.com/news/2017/8/11/venezuelas-citgo-turns-to-canada-for-oil-as-crisis-deepens

 

Venezuela's Citgo turns to Canada for oil as crisis deepens

 

By LUCIA KASSAI AND ROBERT TUTTLE on 8/11/2017

 

HOUSTON and CALGARY (Bloomberg) -- Venezuela’s oil-supply woes are so dire that its U.S. refineries are turning to Canada for help.

 

Citgo Petroleum Corp., the largest U.S. importer of Venezuelan oil and a unit of state-owned Petroleos de Venezuela SA, has started to make quiet inquiries to buy Canadian crude for its refineries in Texas and Louisiana, according to people familiar with the situation. The imports would be used to replace dwindling shipments from Venezuela, where output dropped to a 14-year low in July.

 

Venezuela, the country with the world’s largest crude reserves, is shipping less to Citgo as it redirects more of its shrinking supply to China and India to repay loans. Canadian crude, equally heavy and high in sulfur as Venezuelan oil, is a natural replacement, said Dinara Millington, V.P. of research at the Canadian Energy Research Institute in Calgary.

 

“Canada would be in the best position because that volume would be more or less guaranteed,” Millington said.

 

This would be the first time Citgo imports Canadian oil for its Lake Charles, Louisiana, and Corpus Christi, Texas, refineries in more than two years. Although Canada is the largest supplier of oil to the U.S., more than half of that is absorbed by plants in the Midwest. Limited pipeline connections and expensive rail make it hard for Canadian oil to reach buyers along the U.S. Gulf Coast, home to the world’s largest cluster of refineries.

 

Last week, U.S. imports from Venezuela fell to 507,000 barrels a day, the lowest level in five months, according to data from the U.S. Energy Information Administration. The latest monthly data show that Citgo’s Gulf refineries took 176,000 bpd from Venezuela in May, the least since December.

 

Spokesmen at PDVSA and Citgo didn’t return emails seeking comment.

 

Other refiners

 

Citgo’s not the only company looking north. U.S. refiners have also been on the hunt for alternative supplies amid concern that U.S. sanctions, currently aimed at Venezuelan nationals, may expand and target oil imports from the South American country. One Gulf refiner has started to test fuel oil from Russia and the Middle East and diluted bitumen from Canada as potential replacements, according to a person familiar with the matter.

 

Citgo is starting to feel the effects of falling oil output in Venezuela, exacerbated by 20 years of cash-for-oil deals signed with China, Japan, India and, most recently, Russia. Rosneft PJSC, which signed two long-term oil and oil product supply agreements, said it has made total prepayments for future oil supplies of about $6 billion. That leaves less oil to be processed by the refineries controlled by PDVSA.

 

The Venezuelan crisis isn’t only affecting the Citgo refineries. Venezuelan refineries are operating at less than half of their capacity. In Curacao, PDVSA’s Isla refinery has been importing light U.S. oil since last year to make up for lower domestic production of light grades.

 

Canadian producers

 

While Venezuela hurts, Canadian producers seem to be finally out to catch a break. A reduction in Venezuelan imports may bolster the case for the Keystone XL pipeline, which would carry western Canadian crude directly to the Gulf of Mexico, Millington said.

 

Heavy crudes from Canada, Mexico and elsewhere have increased in value after OPEC and other producers capped output, reducing primarily supplies of less-expensive heavy crude. Western Canadian Select was $10.05/bbl below benchmark U.S. West Texas Intermediate on Thursday, from a $16.15-discount at the end of 2016, according to data compiled by Bloomberg.

 

Higher prices for Canadian heavy crude would come at a welcome time for the industry, said Trevor McLeod, director of the Natural Resources Centre at the Canada West Foundation.

 

“The energy sector in Alberta is struggling a bit right now,” McLeod said in an interview. “They’d absolutely welcome a price increase.”

Crude oil production at Mexico's Pemex hits 22-year low

 

https://www.reuters.com/article/us-mexico-pemex/crude-oil-production-at-mexicos-pemex-hits-22-year-low-idUSKCN1B32RT

 

MEXICO CITY (Reuters) - Monthly crude production from Mexican national oil company Pemex fell below 2 million barrels per day in July for the first time in more than two decades, according to company data released on Wednesday.

 

Average crude output in July was 1.99 million bpd. The monthly average was the lowest level of crude production for Pemex, officially known as Petroleos Mexicanos, since Hurricane Roxanne severely disrupted operations in October 1995, pushing down output that month to 1.90 million bpd.

 

Pemex has experienced a 13-year streak of declining oil output. Seeking to reverse the trend, a landmark oil opening finalized in 2014 ended the firm’s monopoly while allowing private producers to operate their own fields for the first time in decades.

 

Scheduled maintenance on a major Floating Production and Storage Offloading vessel in the Bay of Campeche, home to Pemex’s most productive oil fields, contributed a loss of about 90,000 bpd to the July total, according to a Pemex representative.

 

So far this year, average crude production stands at 2.01 million bpd.

[SharperDingaan]

Sadly any heavy oil from the WCSB, in quantity, is essentially shut-in - as it is the last fill in the pipeline. The good news is that it means higher prices for the heavier grades (to cover alternative transport costs), AND A STRUCTURAL PRICE LIFT on all the lighter grades as well. The positives are starting to compound on each other.

 

All good.

 

SD

[sculpin]

GMP's latest weekly crude oil cut analysis....

 

Price direction. Higher. The data is calling you to the starting blocks.

 

The latest round of weekly data was all-round price bullish in our view. Crude oil and

refined product exports reached record highs again, confirming what we have

been saying for months: that another backlog of crude oil and refined products

in the United States is most unlikely, even during the downtime created by the

refinery maintenance season. Commercial crude oil inventories took a big

tumble and which could have been closer to 7 million barrels if not for another

Harvey-related release of 950 thousand barrels from the strategic petroleum

reserve (SPR).

 

The market remains fearful of any sustained period of +US$50

per barrel prices for WTI, seemingly worried that another surge in Lower 48 U.S.

oil supply will be waiting in the wings to drown the market. Nonsense, we say,

as the plateauing of the oil rig count and the long running rollover in oil rig

productivities is a sign that U.S. supply growth is decelerating. The latest week to-week

reading for Lower 48 supplies of no change may be reflecting what we

suggested last week: that recent supply levels are overstated in the weekly

data versus the more complete monthly data. It might take multiple weeks of

flat to slightly lower figures for Lower 48 supplies before the market begins to

embrace the concept that U.S. supply growth is not the ever rising price bearish

monster than many seem to fear.

 

So if all this data is so bullish, what is holding back WTI prices

(and spooking Brent as well)?

 

We think there are two factors.

 

The first is the still high levels of crude oil inventories at

Cushing (Figure 7), the physical delivery point for the Nymex

WTI contract. Yes, these levels are high, but remain well

below the effective capacity level of 77 million barrels and are

still well below the record levels reached earlier this year.

Moreover, the recent price discounts of WTI to Brent, with

Brent being a benchmark for imported crude oil into the U.S.

East Coast, is resulting in more railing of Midwest and Bakken

barrels to the East Coast. There are anecdotal indications that

more Midwest crude is being shipped to the Gulf Coast

because of the recent discounts. This crude could be refined

domestically or exported. This type of action will slow the

tendency for Cushing inventories to rise.

 

Second, we believe there is still overstated fears that prices

north of US$50 per barrel on a sustained basis will result in

some kind of surge in U.S. crude oil production. We think this

to be more fiction than reality. In our previous analysis we

took great pains to point out that the U.S. oil rig count has

recently plateaued, with a small pop higher last week, but also

that U.S. oil rig productivities rolled over months ago. These

two pieces of information should be sufficient to dispel any

fears that supplies will be rocketing higher to swamp the U.S.

market with crude oil. Besides, it can be exported almost as

fast as it can be produced. The rig productivities and little net

gain in oil rig counts in recent months all suggest a

deceleration in crude oil supply growth, not some magical

resurgence.

 

Martin King (403) 262-0625

mking@gmpfirstenergy.com

Nate J. Heywood (403) 262-0622

njheywood@gmpfirstenergy.com

[Cardboard]

Thanks Sculpin!

 

This analysis by GMP is bang on.

 

Lower 48 States production in the weekly reports has likely been overstated for months. I have said for a few years now that this is crap and their reporting of "0" movement from week to week which happens many times a year is indicative of their incompetence.

 

Regarding the incredible $6 per barrel gap between Brent and WTI, it must be a mouth watering opportunity to large trading houses and it seems to. Exports were almost 2 million barrels/day last week which has to be a record and over double the level of exports seen all year.

 

Cardboard

[SharperDingaan]

The black swan in this - is that at some point there's going to be a reconciliation; of the inventory that is actually there, versus the inventory claimed per the production reports. Ultimately the shortfall will be made up from a big draw on the SPR, & it will shock.

 

This is very similar to a large distributor installing a new inventory system. We all know there will be glitches, but it's hard for the sponsors to publicly recognize it - so they don't. Chaos prevails as what is supposed to be there isn't, the stores work around it by 'plugging' their own numbers in, & eventually there's a system wide count of the inventory - & a write-off. Often painful.

 

Sometimes, incompetence can be a good thing  ;)

 

SD 

[Cardboard]

"Sometimes, incompetence can be a good thing "

 

Maybe good for us investors in the oil patch but, pretty bad for society.

 

A slowly moving higher oil price would prevent economic shocks and favour the transition overtime to other sources of energy.

 

So for these organizations and governments to "tweak" the data is profoundly negative in my opinion.

 

Cardboard

[tombgrt]

I took advantage of the high volatility in GXE yesterday and bought some more at CAD$0.75. For example, last week the stock moved up extremely to $0.90 from $0.76-0.77 on no news, only to end the day on $0.82.

 

On a more general note, while prices are nearing year highs again, I believe the market underestimates rebalancing, oil demand growth and the risks in L-America, Iraq, Nigeria etc. This is mostly a hunch on current market sentiment however from what I've read. Recency bias at work if you ask me. And as SD pointed out, these "seemingly unforseeable black swans" can cause shocks that likely aren't priced in.

[Cardboard]

I think that you should consider T-CJ and T-CONA instead of T-GXE.

 

Both have retreated a fair bit over the last 2 to 3 weeks. All these players are into heavy oil but, EV/PDP NAV is much lower for CJ/CONA, similar price per flowing, much larger/respected players and their decline rate is much lower too. And CJ pays you nicely to wait!

 

Bought some more CJ this morning.

 

Cardboard

[SafetyinNumbers]

I think that you should consider T-CJ and T-CONA instead of T-GXE.

 

Both have retreated a fair bit over the last 2 to 3 weeks. All these players are into heavy oil but, EV/PDP NAV is much lower for CJ/CONA, similar price per flowing, much larger/respected players and their decline rate is much lower too. And CJ pays you nicely to wait!

 

Bought some more CJ this morning.

 

Cardboard

 

CIBC initiated coverage on CJ/CONA this morning. CJ outperform and CONA underperform.

 

Personally, I still like GXE because of the lower financial leverage but more financial leverage could be more attractive if oil prices get very strong. Also, long PPR, IPO and ATU.

[Cardboard]

Lower 48 States production down by 1.083 million barrels/day according to EIA???

 

Have we finally saw the giant lie pop or is it a mistake? Nonetheless, it was down last week and very likely down this week too.

 

Cardboard

[SafetyinNumbers]

Lower 48 States production down by 1.083 million barrels/day according to EIA???

 

Have we finally saw the giant lie pop or is it a mistake? Nonetheless, it was down last week and very likely down this week too.

 

Cardboard

 

I think it’s supposed to be the GOM production offline because of storm activity. Should bounce back.

[SharperDingaan]

Our own thoughts are that the errors are now so big, and so widespread - that it is no longer possible to cover them by a 're-benchmark'. We're also getting an idea as to the general level & degree of incompetency, as very few would attempt to 'smooth the books' & still manage to get it this wrong.

 

The best analogy we can think of is FIMA when Hurricane Katrina came on-shore. A 'good ol boys' sleepy response agency pumping out numbers every week; filled with the clueless - that couldn't deliver when the chips were down  Getting away with what they were doing, because there was no reason to believe that their capabilities just weren't up to it.

 

We would SPECULATE that while the SPR may be showing storage near the top of the average range; the US is not the beneficial owner of a material chunk of it. We're looking at a retail sales floor & seeing lots of inventory available for sale, but not realizing that a good portion of it is consignment inventory being STORED/sold on our floor (for a FEE/commission) - but actually owned by others.

 

When prices were low & 3rd party storing was widespread, the problem was that there wasn't enough storage capacity to go around. We would suggest that some of the SPR capacity was made available for a fee - & that the 3rd party oil hasn't come out yet. Ultimately we would expect a physical for paper swap, that they would previously not have been disclosed.   

 

Nice to see you back.

 

SD

[Cardboard]

"I think it’s supposed to be the GOM production offline because of storm activity. Should bounce back."

 

Sure but, keep an eye on next week production numbers vs last week at 8.977 million barrels/day for Lower 48. If this comes significantly lower than that, then we will know that they have used the storm to "adjust" downward their weekly figure which many have called out as being erroneous vs their monthly figures.

 

Cardboard

[SafetyinNumbers]

"I think it’s supposed to be the GOM production offline because of storm activity. Should bounce back."

 

Sure but, keep an eye on next week production numbers vs last week at 8.977 million barrels/day for Lower 48. If this comes significantly lower than that, then we will know that they have used the storm to "adjust" downward their weekly figure which many have called out as being erroneous vs their monthly figures.

 

Cardboard

 

I hear you. As long as global inventories keep falling though, prices will eventually adjust.

[Cardboard]

Then you have the WTI fraud or over $6 gap to Brent! How useful are these hurricanes to manipulate a paper market?

 

Seaborne or not where are arbitrageurs these days?

 

Cardboard

[SafetyinNumbers]

Then you have the WTI fraud or over $6 gap to Brent! How useful are these hurricanes to manipulate a paper market?

 

Seaborne or not where are arbitrageurs these days?

 

Cardboard

 

My understanding is that around a $4 spread between WTI and Brent is enough to get arbs interested. At $6 we are seeing exports reaching record levels and inventories are falling so I think the market is adjusting. Commercial crude inventories are still 115m bbl over the 10 yr seasonal average (which is an 85m bbl improvement since March). If the trend continues, one would expect prices to improve and spreads to tighten.

[JayGatsby]

On oil production, some people seem to think the monthly numbers are more accurate: https://www.eia.gov/petroleum/production/ . They're fairly delayed (last one was July) so by the time they come out they aren't very newsworthy. I don't know enough to have a view, but it is a different data set.

 

Any views on the WCS/WTI differential? Between the possibilities of Keystone XL and TransMountain (it sounds like the recent Enbridge line is more logistical simplification than actual increased oil) it seems the oil may be a bit less landlocked? I don't know enough about the chemistry, but if Venezuela production decreases that could increase demand for heavy Canadian oil?

[SharperDingaan]

"Any views on the WCS/WTI differential? Between the possibilities of Keystone XL and TransMountain (it sounds like the recent Enbridge line is more logistical simplification than actual increased oil) it seems the oil may be a bit less landlocked? I don't know enough about the chemistry, but if Venezuela production decreases that could increase demand for heavy Canadian oil?"

 

There's a strong argument that while this widens, it's largely offset by FX effects. The price of WTI rising because of a bump in the value of its heavier fractions (driven by Venezuelan cutbacks), the price of WCS staying flat as it isn't displacing lighter fractions in the pipeline. $CAD diving as there's less CAD oil being sold.

 

To really change this Alberta needs to be refining versus just exporting, & exporting gasoline via pipeline.

Unfortunately, its highly unlikely to occur.

 

SD

 

 

[Cardboard]

Well, it looks like that the hurricane effect (Gulf area partial shutdown) was the entire explanation for last week big drop in Lower 48 States production estimate. Looked much larger than Harvey which basically paralyzed Houston hence my initial reaction.

 

They are now saying 9.003 million barrels/day which is 26,000 barrels/day above 2 weeks ago. I still don't trust this number with so many flaws over the years with: production moving by zero for I don't know how many weekly estimates?, monthly production numbers never matching and this:

 

Total petroleum stock have declined by a whopping 12.2 millions barrels last week while crude oil was up by only 0.5 million barrels. We are not into the Summer driving season but, typically a pretty weak demand period for gasoline and even distillates or both down over 5 million barrels each. So pretty strong consumption. There are also a lot of refineries undergoing maintenance and switch to winter fuels but, they normally do it at this time since consumption is lower.

 

Then if you look at oil demand from refineries, it pretty much matched the net imports increase. However, we are told that production from Lower 48 States did increase by 1.1 million barrels/day from the week before or 7.7 million barrels. Where did that oil go?

 

The only logical explanation would be that this oil is still in transit from the wells to storage area. So if it is not added up to oil inventories next week, while taking into account the other numbers, there is definitely something really weird with that estimate.

 

Cardboard

[sculpin]

Tax Loss Selling Candidates in Canadian Energy - Probably Corps & Mutual Funds crystalizing their tax losses - Canadian energy has no shortage of opportunities....

 

Symbol Company YTD Price Change

 

MEI Manitok Energy Inc. -70.3

PONY Painted Pony Energy -69.3

CPI Condor Petroleum Inc. -69.2

NAL Newalta Corporation -69.0

CQE Cequence Energy Ltd. -64.8

OXC Oryx Petroleum Corp* -64.2

WRG Western Energy Services -61.3

CJ Cardinal Energy Ltd. -60.4

EGL Eagle Energy Inc. -60.3

PD Precision Drilling Corp -58.7

PNE Pine Cliff Energy Ltd. -56.6

TDG Trinidad Drilling Ltd. -56.3

PMT Perpetual Energy Inc. -54.9

BXE Bellatrix Exploration -53.6

BTE Baytex Energy Corp. -53.5

BNE Bonterra Energy Corp. -52.0

CPG Crescent Pt Energy Corp -49.8

PHX PHX Energy Services -48.2

ATH Athabasca Oil Corp -47.8

CONA Cona Resources Ltd. -47.4

OBE Obsidian Energy Ltd. -46.8

BNP Bonavista Energy Corp. -46.8

BIR Birchcliff Energy Ltd. -46.0

GXO Granite Oil Corp. -45.7

CR Crew Energy Inc. -45.0

ZAR Zargon Oil & Gas Ltd. -44.9

PEY Peyto Expl. & Dev. Corp -44.9

AOI Africa Oil Corp.* -42.5

VII Seven Generations Egy -42.4

MEG MEG Energy Corp. -41.9

TAO TAG Oil Ltd. -41.6

CVE Cenovus Energy Inc. -40.9

SPE Spartan Energy Corp. -40.6

SGY Surge Energy Inc. -39.0

GXE Gear Energy Ltd. -38.1

TOU Tourmaline Oil Corp. -37.0

VLE Valeura Energy Inc. -36.8

CKE Chinook Energy Inc. -36.3

PXX BlackPearl Resources -36.2

GTE Gran Tierra Energy Inc* -35.2

TNP TransAtlantic Petro.* -34.9

SRX Storm Resources Ltd. -34.9

SES Secure Energy Services -34.7

PGF Pengrowth Energy Corp. -33.7

SOG Strategic Oil & Gas Ltd -33.3

XOP Cdn Overseas Petroleum* -33.3

RRX Raging River Explor. -33.2

ESI Ensign Energy Services -33.0

UEX UEX Corporation -32.7

GRO GrowMax Resources Corp. -32.3

ARX ARC Resources Ltd. -32.1

PRQ Petrus Resources Ltd. -31.4

DEE Delphi Energy Corp. -30.8

SNM ShaMaran Petroleum* -30.4

TOG TORC Oil & Gas Ltd. -29.4

ESN Essential Energy Srvcs -28.9

JOY Journey Energy Inc -28.6

WCP Whitecap Resources Inc. -28.0

LXE Leucrotta Exploration -27.9

SCL ShawCor Ltd. -26.1

DML Denison Mines Corp.* -25.7

XDC Xtreme Drilling Corp. -25.0

VET Vermilion Energy Inc. -24.7

AAV Advantage Oil & Gas Ltd -24.2

HWO High Arctic Energy Serv -21.9

EFR Energy Fuels Inc.* -19.9

CCO Cameco Corporation -19.7

OYL CGX Energy Inc.* -19.2

AKT.A AKITA Drilling Ltd., A -17.4

RMP RMP Energy Inc. -17.1

TVE Tamarack Valley Energy -17.1

MTL Mullen Group Ltd. -16.3

POE Pan Orient Energy -16.3

CEU CES Energy Solutions -16.1

IMO Imperial Oil Limited -15.9

ERF Enerplus Corporation -15.7

ALA AltaGas Ltd. -15.0

ECA EnCana Corporation* -13.2

ENF Enbridge IF Holdings -12.9

IPL Inter Pipeline Ltd. -12.9

ENB Enbridge Inc. -12.7

QEC Questerre Energy Corp. -12.6

TWM Tidewater Midstream -12.6

CNE Canacol Energy Ltd* -12.0

TGL TransGlobe Energy Corp* -11.5

PKI Parkland Fuel Corp. -11.1

PSI Pason Systems Inc. -10.7

FCU Fission Uranium Corp. -9.4

SRHI Sprott Resource Holding -9.1

KEY Keyera Corp. -8.7

GEI Gibson Energy Inc. -8.6

TCW Trican Well Service Ltd -8.0

PXT Parex Resources Inc.* -6.5

MCB McCoy Global Inc. -6.1

SEN Serinus Energy Inc.* -5.3

SU Suncor Energy Inc. -4.3

KEL Kelt Exploration Ltd. -3.8

CNQ Cdn Natural Resources -3.5

 

[SafetyinNumbers]

That list doesn't even include two of my favourite losers, PPR.TO and IPO.TO.

[sculpin]

Picked up off the IV Energy board...

 

Global inventories were 373M over the 5 year average last November...they were 170M over there 5 year average as of this August off which 135M was oil and other 35M were refined products..Since then, as of the end of October, latest data shows 125M over the 5 year average. That's a 250M barrel spread over about 11 months..now add 100M decrease in floating storage and hidden storage in S Africa and the Caribbean...that's now a 370M decline over 11 months...Add Kurd region being down 300k per day and accelerated declines as reported by OPEC and you get about 40 to 45M barrels reduction per month as we stand right now..The world will be going into shortages by the end of the year and dropping below the 5 year average as we speak...there are more pipes out there now too then three years ago which should be netted out of the 5 year average per Ross at Platts

 

 

https://www.investorvillage.com/groups.asp?mb=19168&mn=115567&pt=msg&mid=17644510

[SharperDingaan]

Keep in mind as well that the rolling 5 year average is ALSO a very high number, as cheap oil was deliberately being put into storage for much of this period. Hence, when inventory initially falls below the 5 year average - it is highly likely that the reaction will be a lot more muted than many would expect, continuing the sleepwalk.

 

A useful analogy is the drug trade at an extended Rave. Initially the drugs go out at low prices to displace competing product, prices and quantity then gradually increase to both distort judgement & addict as deeply as possible, then supply is suddenly cut back to create panic pricing. Time honored, ruthless, effective - & unfortunately, we know that it works very very well.

 

Look at what the 5-year average NORMALLY is across MULTIPLE cycles, subtract it from the current average; and divide the difference by the average draw down rate/month for the last 12-18 months. The result is a rough idea as to how long before we go to panic pricing.

 

Different strokes.

 

SD

 

 

 

[Cardboard]

"A useful analogy is the drug trade at an extended Rave. Initially the drugs go out at low prices to displace competing product, prices and quantity then gradually increase to both distort judgement & addict as deeply as possible, then supply is suddenly cut back to create panic pricing. Time honored, ruthless, effective - & unfortunately, we know that it works very very well."

 

Is this from personal experience and use? LOL!

 

Cardboard

[SharperDingaan]

Conversation with 'interesting-people'.

Good is good - no matter which side of the line they happen to be on; and the drug dealer sends his/her kids to business school - the same as everybody else. Perspectives are different, but otherwise its largely the same issues - just in a different wrapper.  It's not that unusual either; think of the traditional policemen/villain spectrum, where both are often 'family' businesses. 

 

SD